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VEGA: February 2019 Portfolio Manager Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/fund/vega.

Category Review

  February 2019 YTD
VEGA NAV* 2.40% 8.68%
MSCI ACWI World Index 2.67% 10.78%
BXM Index 1.43% 4.91%
U.S. Aggregate Bond Index -0.06% 1.00%

Portfolio Review

Markets continued their ascent in February, albeit not as strong a showing as January. Most holdings were positive contributors in February, especially those that are equity based.

The best place to be invested during the month of February would have been in equity investments, especially Small Cap:

WINNERS Ticker Feb. 2019 Perf.
SPDR Select Sector Fund – Technology XLK 6.9%
iShares Russell 2000 ETF IWM 5.2%
Xtrackers MSCI Europe Hedged Equity ETF DBEU 3.2%
SPDR S&P 500 ETF Trust SPY 3.2%
iShares MSCI EAFE ETF EFA 2.5%

The biggest laggards in February would have been Fixed Income based, because while they were mostly positive they didn’t’ contribute much to the overall return:

LAGGARDS TIcker Feb. 2019 Perf.
iShares Core U.S. Aggregate Bond ETF AGG -.10%
First Trust Low Duration Opportunity LMBS 0.2%
iShares Barclays 1-3 Year Credit Bond Fund IGSB 0.4%

Top 10 Holdings

Ticker Security Description Portfolio Weight %
SPY SPDR S&P 500 ETF TRUST 43.08%
EFA ISHARES MSCI EAFE ETF 8.41%
IWM ISHARES RUSSELL 2000 ETF 6.13%
IGSB ISHARES SHORT TERM CORPORATE 5.70%
[cash] BLACKROCK LIQUIDITY T 60 5.51%
DBEU XTRACKERS MSCI EUROPE HEDGED EQUITY ETF 4.62%
BKLN INVESCO SENIOR LOAN ETF 3.83%
HYGH ISHARES INT RATE HEDG HY ETF 3.83%
LMBS FIRST TRUST LOW DURATION OPP 3.75%
XLK TECHNOLOGY SELECT SECTOR SPDR FUND 3.54%

As of 02.28.2019.

Activity

VEGA ETF continued writing Out-Of-Money Calls on SPY and EFA, which continues to provide a buffer to the decline of the underlying securities and the ability to earn higher premiums due to increased volatility.

Outlook

Financial markets in February built on record January numbers as investors loaded up on assets across the spectrum. The U.S. economy remained strong despite the federal government shut down and hostile weather events. While some economists anticipate a recession within the next two years, consumers and business owners seem to have remained confident about the future. Ray Dalio, Co-CIO of Bridgewater Associates, the U.S.’s largest hedge fund, recently said that while he still expects that there will be a significant slowing of growth in the U.S. and most other countries, he has lowered his odds of a U.S. recession coming prior to the U.S. presidential election to about 35% from over 50% just 2 months ago.

Markets

Share prices continued to build on January’s heavy gains, setting up what one analyst argued was a sign for a bullish year. “Since 1938, there’s been 30 years where both January and February have been positive”, Jodie Gunzberg, head of U.S. equities at S&P Dow Jones Indices, told CNBC.  “And 29 of those years out of 30 have ended up positive, and big, on average over 20 percent.”

If share buy-backs continue at this pace, Wall Street is on track for another year of record share buy-backs, having already repurchased shares totaling just over $1 trillion in their own stock during 2018, according to CNBC. At the same time, Seeking Alpha reported the number of dividend cuts, in its sampling for the first quarter of 2019, has surpassed the total recorded in the first quarter of 2018. In addition, the near-real time sources that it tracked for dividend cut announcements suggests that distress is spreading beyond the oil and gas sector of the economy. Meanwhile, Reuters concluded that analysts expect first-quarter earnings for the S&P 500 companies to decline 0.1% on a year-on-year basis which according to IBES data would be the first decline since 2016. FactSet consensus forecasts that while corporate earnings would be soft in Q1 2019 due to the combination of several factors, those same earnings would regain momentum for the remainder of the year, finishing at a Q4 2019 estimated level of almost 9.1% above Q4 2018. Revenue growth would also be stronger and increasing 5%.

February was a strong month for debt markets, from treasuries to speculative assets, and the yield curve dynamics shifted from a two-year bear flattener to Fed ambiguity, if not outright optimism. Wolfstreet.com reported that over the 12 months through November 2018, U.S. federal debt rose by $1.26 trillion. Over the period, foreign holders sold $105 billion of treasuries while the Fed sold $204 billion; U.S. government entities such as pension funds and social security bought $20 billion; American banks, fund management companies, institutions and individual investors bought $1.36 trillion. According to the financial website, with world foreign currency reserves having stopped increasing since 2014, and as quantitative easing has slowed or stopped, funding the U.S. government has shifted to savers. “All the movements in asset prices over the past six months bear witness to the huge shift in savings underway,” it averred, “with negative implications ultimately for economic growth.” Importantly, Chairman Powell appears to recognize the issues and told Congress in February that the Fed would be pausing interest rate increases, holding them at current levels. The Fed also hinted about ceasing balance sheet normalization later this year. The Chairman went even further, indicating that if needed, the Fed had the resources to support the economy.

Heartland Advisors chief executive, Will Nasgovitz, expressed concerns over the torrent of corporate debt coming due in the next few years. “With interest rates low, the economy strong and relatively easy lending standards, the thinking went that borrowing to buy-back shares or finance acquisitions was a low-risk strategy,” Nasgovitz explained in a post. “But the next five years could severely test that Pollyanna view.”  Nasgovitz, who oversees about $1.3 billion in assets, wrote that the expiration of some $3.3 trillion — roughly half of all current outstanding commercial debt — “would be challenging for the market to digest in the best of scenarios, let alone this late in an economic expansion … let alone as lending standards have begun to tighten for commercial and industrial borrowers.”                 

In the wake of the Fed’s pause on interest rate hikes, Reuters concluded that at the onset of each of the last four recessions, the effective federal funds rate had peaked and was already falling by the time the business cycle turned down. “Peaking interest rates have often been a harbinger of an imminent recession as the Fed responds to signs that the expansion is running out of momentum,” according to the news wire. “In every one of those cases, even interest rate reductions were not enough to prevent the economy turning down a few months later.”

U.S. Economy

Last year’s fourth-quarter growth slowed to an annual growth rate of 2.6% but beat the consensus 2.4% estimate despite the impact of the federal government shut down and hostile weather. On an annualized basis, the 2018 economy performed the best it has since 2005 growing GDP by 3.1%. Outlooks for the economy cleaved between economists and consumers. Half the nation’s business economists said they think the U.S. economy will slip into recession by the end of next year, according to the Associated Press, and three-fourths anticipate such a downturn beginning by the end of 2021. However, a survey by the National Association for Business Economics showed that only 10% of its members said they foresee a recession beginning this year while only 11% expect the economy to avoid a recession through 2021.

The unemployment rate has increased slightly to 4% from a 49-year low of 3.7% late last year, according to MarketWatch, however the increase is for all the right reasons. More Americans are entering the labor force in search of work with job openings at an all-time high. Further, incomes and wages are growing at the fastest pace since the end of the 2007-2009 recession.

Optimism about personal finances soared to its heights in 16 years, according to a Gallup study, as 69 percent of Americans expect to be better off this time next year. Confidence increased in February to 131.4 from 121.7 in January, the Conference Board said, as expectations rebounded following recent months of market volatility and the government shutdown. The NFIB Small Business Optimism Index slipped 3.2 points in January, as owners continued hiring and investing. Meanwhile, the University of Michigan survey dipped slightly but the results were still at cycle highs.

Pending home sales surged 4.6% to 103.2 in January, much stronger than expected, after tumbling 2.3% to 98.7 in December (revised from 99.0). This breaks a string of six straight monthly declines. The index was at 105.6 last January (revised from 104.3).

International

German manufacturing orders slumped in December, led by a sharp drop in orders from outside the eurozone as Berlin said that total manufacturing orders declined 1.6% from November, while economists polled by The Wall Street Journal had expected a 0.3% rise. The economics ministry said “the dry spell in German industry” appears to be continuing.

Slipping for the third consecutive month, eurozone inflation rose 1.4% in January – down from the 1.6% reported in December – thanks to lower energy costs. Core inflation slightly increased, however, a comforting sign for the European Central Bank and its monetary policy decisions. Excluding volatile energy and unprocessed food prices, the indicator inched up to 1.2% in January, above expectations of an unchanged 1.1% reading.

China’s year-over-year PPI growth slowed to 0.1% in January, below the 0.3% expectation, marking the seventh consecutive monthly dip. Slowing factory inflation also raised strong concerns about growing deflation and the issues that it may pose for corporate profits. Such metrics will force Beijing to ply the economy with more debt, according to UBS Group AG. The bank argued that China’s total debt-to-gross-domestic-product ratio will rise again this year, after remaining flat in 2017 and declining in 2018. The analysis followed a rise in new credit in January that exceeded expectations. However, the NDRC said the government will implement measures to further boost domestic consumption this year. China will boost the incomes of urban and rural residents, and domestic consumption is expected to continue to expand and upgrade. It said it is confident of meeting its growth target in 2019.

Japan’s Manufacturing PMI in January fell to its lowest level since August 2016 as production and order books deteriorate and a global trade downturn took a toll on the country’s exporters.

In Latin America, Mexican consumer confidence rose to 116.8, the highest level since August 2001 and up from 12- and 24-month averages of 99.8 and 93.2 respectively following the election of President Andres Manuel Lopez Obrador’s last December.

Within Emerging Markets, Reuters reports that monetary policy across a group of 37 developing markets has shifted from tightening to loosening. A net 3 central banks cut rates in February compared to 1 net hike in January, which was the 9th consecutive month of net hikes or no change, the longest such run since the summer of 2011 as policymakers battled the fallout from the stronger dollar.

Very Truly Yours,

David Young
Partnervest Advisory Services, CIO
AdvisorShares STAR Global Buy-Write ETF (VEGA), Portfolio Manager

Information is from sources deemed to be reliable, but accuracy is not guaranteed.

*Performance and pricing data used for VEGA ETF is based on the indicated value of the ETF at the close of the day.


Definitions:

The Barclays Capital U.S. Intermediate Government Bond Index measures the performance of U.S. Dollar denominated investment grade U.S. corporate securities that have a remaining maturity of greater than one year and less than ten years.

The Cboe S&P 500 BuyWrite Index (BXM) is a benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index.

The MSCI ACWI World Index is is an unmanaged free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.

An option is a privilege, sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price within a certain period or on a specific date.

An option premium is income received by an investor who sells or “writes” an option contract to another party.

covered call option involves holding a long position in a particular asset, in this case shares of an ETP, and writing a call option on that same asset with the goal of realizing additional income from the option premium.

put option is a contract that gives the owner of the option the right to sell a specified amount of the asset underlying the option at a specified price within a specified time.

protective put is an option strategy which entails buys shares of a security and, at the same time, enough put options to cover those shares. This can act as a hedge on the invested security, since matching puts with shares of the stock can limit the downside (due to the nature of puts). 

Exercising an option means to put into effect the right specified in a contract.

The Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.


Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.

There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. Other Fund risks included: allocation risk; derivative risk; early closing risk; Exchange Traded Note risk; liquidity risk, market risk; trading risk; commodity risk; concentration risk; counterparty risk; credit risk; emerging markets and foreign securities risk; foreign currency risk; large-, mid- and small- cap stock risk. Please see the prospectus for detailed information regarding risk. The Fund is also subject to options risk. Writing and purchasing call and put options are specialized activities and entail greater than ordinary investment risk. The value of the Fund’s positions in options fluctuates in response to the changes in value of the underlying security. The Fund also risks losing all or part of the cash paid for purchasing call and put options. The Fund may not be suitable for all investors.

Shares are bought and sold at market price (closing price) not NAV and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times. Holdings and allocations are subject to risks and to change. The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter.

The views in this material were those of the Portfolio Manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.